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It's Tough Out There!

The markets will recover, advisors say, but many a

Although we recently began the fourth year of the bear market, there was no mention of the bear's birthday in personal finance magazines, no specials marking the occasion on Cable TV financial talk shows, and none of the advisor Web sites mentioned the inauspicious anniversary. The dismal day slipped past us unnoticed on March 24 because we were all justifiably preoccupied with the war in Iraq, which began on March 19.

With America's victory now in hand, and polls showing that a majority of Americans now feel like we are winning the war against terrorism, there is good reason to hope better times will soon be upon us. But with the shadow of September 11 still shading how history will record the era in which we live, the beginning of the fourth year of the bear market seems a fitting time to take stock and assess the damage wreaked on independent advisors by that market.

With the help of the Internet, I surveyed the 35,000 subscribers to Investment Advisor's e-mail newsletters, along with my own database of about 700 advisor e-mail addresses. Nearly 1,100 financial advisors responded from April 10 through April 15. By better than a 5 to 1 margin, advisors said they believe the economy and stock market will strengthen over the next 12 months; about a third believe the bear market has spurred them to focus on financial planning and not just investing; a majority said their revenues are lower than they were three years ago; and about 95% said their average portfolio is worth less today than it was three years ago.

For the record, the bear market is widely thought to have started on March 24, 2000, when the Russell 3000, a broad index representing 98% of the stock market's total capitalization, traded at 3247. As of April 15, 2003, the index was at 1918.35, a 39.2% loss equal to about $5.4 trillion, according to the Frank Russell Company. From its peak on March 24, 2000 to its trough of 1727 on of March 11, 2003, the Russell 3000 declined 44.9%.

Amid this stunning reversal, advisors are questioning the most basic assumptions about investing. For instance, we all know that when stock prices go down, you should maintain your allocation to stocks. Rebalancing would thus have an advisor buying more stocks at low prices and force a dollar-cost-averaging discipline. Yet in our survey, more than 40% of the advisors responding said that over the last 12 months they had reduced allocations to stocks in client portfolios that they manage. Less than half said they maintained the same allocations to equities over the previous 12 months. Just 6% of them said they increased their stock allocations over the prior 12 months.

I guess you can toss aside the notion that advisors adhere strictly to asset allocation as preached by Modern Portfolio Theory, which would have you allocating more to stocks in a bear market based on stocks' long-term historical behavior. Emotion gets to you, and you generally are not adopting the institutional and academically accepted methods of managing money as much as your marketing materials would seem to claim.

Stanching the Wound

Perhaps this lightening up on equities helps explain why a good number of advisors said they have sustained losses over the previous three years that are significantly lower than the 39.2% drop in the Russell 3000. When asked, "Which of the following statements best describes the value of assets you managed for clients since the bear market began," only 2.8% said their client portfolios had suffered a loss greater than 40%. About 1% said their portfolios declined between 30% and 40%.

Even if you keep in mind that advisors are managing portfolios composed of stocks, bonds, and other asset classes, the results would seem to indicate that many advisors surveyed have served their clients quite well during the bear market.

Nearly a third of the advisors said their client portfolio dropped in value between 20% and 30% since the bear market began. Even if you assume that these advisors answering the poll had some bonds in all of their portfolios, that's about in line with the market's performance during the bear market. A portfolio with 80% in the Russell 3000 index and 20% in five year U.S. Treasuries would be down about 24%--although that's before fees.

What's impressive, however, is that about 35% of the advisors say their portfolios are down between 10% and 20%; another 15% said they were down less than 10%. About one-half of 1% of those polled said they actually eked out a gain over the bear market period. Thus, the survey results indicate that many independent advisors have managed client portfolios with much better results than the market has yielded over the bear market period and have earned their fees.

Meanwhile, the effect of the bear on advisory firm revenues has been dramatic. About 13% of the advisors surveyed said their revenues over the past three years have plunged more than 30%, with another 12% saying their revenues have sunk between 20% and 30%. Sixteen percent report revenues down 10% to 20%, compared to what they were before the bear attack. Another 12.5% say revenues have fallen by 10% or less. Interestingly, nearly 45% of the 1,100 advisors said their revenues have risen since the bear market began, with 13% reporting that revenues are 30% higher or more.

With more than half the advisors saying they are bringing in less revenue than they did three years ago, it's not surprising that about half of those surveyed also said they have cut spending in the previous 12 months on marketing, salaries, or technology. Twelve percent said they reduced salaries--by far largest area of cutbacks, while about 7% are spending less on marketing and 5% are spending less on tech. About 53% said they made no spending cuts in these areas in the previous 12 months.

Meanwhile, while 37% said they are not spending more on marketing, technology or salaries, the rest said they have increased spending in these areas, with marketing and technology being the two biggest areas of increased expenditures.

One surprising result in the survey is that only about 10% of the advisors participating in the poll said the bear market has spurred them to focus their practice on life planning. This new niche attempts to find out what clients really want to accomplish with their money and aims to make their lives more meaningful, and it has been covered a great deal in the trade press. Only 110 of the 1,074 advisors responding to the survey said they are focusing on life planning because of the bear market. But nearly a third said the bear market has spurred them to focus their practice on financial planning and not just investing, while the remaining 56% of advisors said the bear market had brought about no change in their practices.

A Reflection of Optimism?

Respondents submitted answers to the survey in the days right after the 40-foot statue of Saddam Hussein was toppled in Baghdad's Firdos Square, and the same week Defense Secretary Donald Rumsfeld announced that the major combat in Iraq was completed and seven American POWs had been rescued. My guess is that all this good news must have made the advisors taking the survey giddy, because about 87% of them said they thought the economy and stock market would strengthen over the next 12 months. Just 13% said they believed the economy and stock market would get worse.

Some would say that overwhelmingly bullish sentiment is a reverse indicator and that the market would not bottom out until most advisors predict the market will worsen over the next year. I don't think that's true. I believe a huge swing in sentiment occurred the week we surveyed advisors, and that's why so many became more bullish. That's why they reported that they had allocated less to equities in the previous 12 months.

The proof will come in three months, when we will conduct another survey to determine advisor sentiment. I'm betting that in the next survey we will see far less than 87% of advisors predicting stocks will strengthen over the coming 12 months.

In fact, with your cooperation, I am hoping to turn a survey like this one, which had 15 questions and took an average of just three minutes to complete, into a semiannual or quarterly event. I will, of course, share the most significant findings with you. Your response to this first survey truly was wonderful, and the data can help you better understand what your colleagues are doing.

Coping Mechanisms

In the e-mail inviting advisors to take the survey, I assured respondents of confidentiality, and created a field where respondents had the option of filling in a name and phone number to allow me to contact them and interview them. I combed the 1,074 responses (as of midday, April 16) received within 36 hours of our e-mail blast to find the most provocative answers to the last question of the survey. Advisors were asked to fill in the blank in the following sentence: "The single best thing I did for my business this year was ________." Here are some of the answers from advisors that might give you ideas about how your colleagues have coped successfully with the bear market.

Johnne Syverson of Syverson, Strege, Sandager & Company in West Des Moines, Iowa, says his firm in the last year went from adding one new client a month in its charitable planning specialty niche to five. The ground was laid a year earlier when SSS hired a marketing consultant who recommended that the firm focus on developing its charitable giving advice program.

Since few players specialize in this niche and it requires a long ramp-up with a big up-front investment, the fact that SSS already had a program developed that would educate donors put it ahead of the game. But with a mature practice of 250 clients, SSS did not have anyone dedicated to sell the service. SSS hired a former Army recruiter who knew nothing about financial planning but did know how to reach people, tell them the story, and follow up.

Syverson says charities host "rubber chicken dinners" where presentations are made about charitable remainders trusts and other sophisticated techniques. While the dinners are well attended and the speakers are often great, no business ever develops without solid follow-through. SSS, however, is paid by charities to make presentations about planned giving to their big donors and tells them how they can make their charitable giving more effective financially. More importantly, the dinners are followed by a free personal and confidential consulting session with each potential donor that gives them a second opinion on their existing giving strategy.

Timothy Ellis Churchwell of Scott & Stringfellow in Richmond, Virginia, says he brought in a partner who could focus on implementation of financial plans he creates. "He does the tactical investing, while I handle the strategic planning issues of the client," says Churchwell. In addition, they conducted a review of each segment of their business to determine which ones are most profitable and now focus their resources on the most profitable activities. "I think most people in our industry don't treat their business like a business," he says. "Everyone talks about a business plan but few actually have one."

Ron Kelemen of The H Group in Salem, Oregon, says staying focused on financial planning with clients has been essential over the last year. Kelemen says his firm reviewed the IRA beneficiary designations made by clients. "It's kept clients in the fold because even though their accounts are down, we have added value to their lives," says Kelemen. He adds that there are so many opportunities for mistakes when clients fill out their IRA custodial forms, that making sure they properly fill them out brings you closer to clients. This can also help you avoid the possibility of a claim down the road for not doing the job right.

Kelemen says another focus at his firm has been on doctors retiring early. With Medicare cuts, private health insurers crimping doctors, and higher medical malpractice insurance premiums, this niche is paying off, he says.

Upping the Ante

Numerous respondents said they had successfully raised fees or account-size minimums in the past 12 months. One advisor, who asked not be quoted by name, said her accounts are down 30% to 40% from the market peak and that she lost some of the 70 clients she had at the beginning of 2000. Some lost their jobs and saw her fees as an onerous expense and one or two others just became disenchanted. "It was terrifying, especially last summer when the market was plunging," she said. "I was hearing from clients who never called me before with any issues, and I lost some of them."

The advisor says she realized that the clients most affected by the losses were actually her smaller clients, so she steeled herself and decided to hike her minimums so she could work with fewer clients who had more assets. She raised her minimum from $800,000 to $1.2 million and went from a practice with 70 clients and $60 million under management to a practice with $47 million and 56 clients. She is happier because she can give her clients more personal attention.

Undoubtedly, advisors most often cited greater contact with clients as the single best thing advisors they did over the previous 12 months for their business.

"I made a concerted effort to be more 'in-touch' with my clients' deeper desires, and convey to them that there is no such thing as an 'average annual return' in the equities market," says Rick Dworsky of American Express Financial Advisors in Minneapolis. "Additionally, I let them know that I am genuinely feeling their pain in watching their investable net worth decline, and they are not alone. I am also less hard on myself, in realizing that although I have responsibility for guiding them in the allocation of their portfolios, I do not control the market, during either its ups or downs."

Dworsky's response echoes comments from many advisors responding to the survey. The single best thing advisors seem to do most often was communicate more and reassure clients. "I didn't freak out about what was happening," as one put it. "I kept my clients informed and educated about what was happening," said another. "I answered the phone every day and didn't hide," said one. Dworsky says the conversations he had with clients opened the possibility of revising their plans for retirement. "Maybe a client can make adjustments by dialing down goals, maybe working longer, or transitioning into retirement rather than doing it cold turkey," says Dworsky. "I'm not suggesting they change their goals, but just open up the discussion."

"When a client says he wants to retire at age 66, it used to be an automatic assumption that he would simply stop working," says Dworsky. "That's changed. Maybe it's okay to work a day a week at Home Depot or get by on a little less." Dworsky says these talks with clients have forged closer relationships. "I think it's allowed me to hold on to clients, and I feel better about what I am doing," he says.

Upping the Ante

Dan Kinney of Danforth Financial Services in Des Moines, Iowa, says rather than trying to find new clients, he's spending more time with existing clients, which has led to an increase in separate account assets he's managing. "A lot of my clients had assets in discount brokerage accounts that they managed themselves," says Kinney. "They see that those accounts underperformed the assets we were handling for them."

Kinney says he also has had success with 401(k) education. Kinney says that Danforth has been providing 401(k) plans to smaller groups for some years, but this past year the firm offered employers free education session for their employees. "No sales pitch is involved," he says. "But after you hold two or three quarterly meetings for the employees, a few of them wind up coming up to us after the sessions for help with their individual accounts and ancillary business is generated." Oh, yes: We asked advisors, "What's the best thing I did for my business in the last 12 months?" One common response: "I took a week off."

Want to know what your peers consider "The single best thing I did for my business this year"?, go to